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"How to Protect Yourself in Lease Options?"

By David Finkel

When you are buying a house on a lease option,
you must protect yourself from paying your rent payment to the
seller, but him not paying the lender. The single best way to
protect yourself is for you to pay your payment directly to the
LENDER so that you are certain that the payments are kept current.
Many sellers will be okay with this, although many sellers won't.

Pay the lender directly

Whenever possible, this is how I handle my own
lease option properties. Currently for about 30% of my houses
I pay the lender directly. In many cases, I started off paying
the seller directly, but after a little bit of time had passed,
and I built up trust in the relationship, I ask the sellers if
I can just send the payment to the lender directly.

Note: One very powerful way
I build trust in the relationship is that I pay my sellers EARLY!
I mail checks out on the 25th of each month. You would be amazed
at how this small gesture impacts your relationship with the seller.

Option two is for you to set up an escrow account
you pay your monthly payments into, and for this escrow company
to pay the lender each month (and notifying the seller and you
that they have done so.)

I don't use this method because it's too complicated
for my thinking. Variations on this theme are to send the seller
a check made payable to the lender in the amount of the mortgage
payment with a pre-addressed and stamped envelope to let the seller
quickly forward the check on to the lender.

This allows the seller to feel confident that
the payments are coming in, and lets you know that the payment
has been made (by checking to see if the check has cleared.) Instead,
if I can't pay the lender directly, I simply pay the seller and
let them pay the lender. How do I know the payments are being
made?

I get the seller to sign two specific documents
up front (in addition to the performance mortgage or deed of trust
and all the other closing paperwork we escrow on the front end
of any lease option deal.)

Document one: Authorization to Release
Information

This gives me the ability to talk with the lender
about any of their loans. I can even check every few months that
the payments are current by calling into the lender's touch tone
phone hotline and entering in the seller's loan number and social
security number!

Document two: Authorization for Direct Payments

This gives me the right to pay any third party
that is owed money by the seller that the seller hasn't paid who
could place a lien on the property, and to count this money as
money paid by me to the seller under my lease option agreement.
This includes mortgage payments, property tax payments, etc.

Here's part of the agreement we use when buying
on a lease option. See if you can find the powerful incentive
we give the seller to make sure he does in fact make his payments
with the money we send him:

"If the mortgage payments, property taxes,
association fees, insurance premiums, or other property payments
on __________________________ ever go into arrears, then ________________________________
(Landlord) hereby gives_______________________________ (Tenant)
or his/her/its assigns or heirs the right to make payments directly
to the lender or other party who is owed payment on Landlord's
behalf.

These payments sent directly to the lender
or these other parties by the Tenant shall be considered as
rent (or other money due) received by Landlord from Tenant for
compliance of Residential Lease Purchase Agreement between these
parties dated _________________.

To adequately compensate the Tenant for the
additional risk incurred by making such payments of additional
rents and costs, for every one dollar ($1) paid to lender or
other parties to make up late payment(s) and/or fee, premiums,
etc., three dollars ($3) shall be credited off the option price
stated in the Residential Lease Purchase Agreement of December
__________________.

Once these payments/fees are made current,
Tenant may make his or her payments directly to the Lender and
other parties for the remainder of the lease period state in
the Residential Lease Purchase Agreement dated on ______________
between _____________________________ (Tenant) and ____________________________
(Landlord).

These continuing payments sent directly to
the lender or these other parties shall be considered as rent
(or other money due) received by Landlord for compliance of
Residential Lease Purchase Agreement between these parties dated
on ___________________, but shall not be credited with the three
for one credit detailed above."

RESOURCES

David Finkel is an ex-Olympic level athlete turned real estate
millionaire and one of the leading investing experts in the nation.
He and his partner, Peter Conti, teach people across the country
how to create multiple streams of income buying homes in nice
areas with nothing down and minimum risk. Over the past decade,
his students have bought and sold over $100 million worth of real
estate.